Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/273826 
Year of Publication: 
2023
Series/Report no.: 
Tinbergen Institute Discussion Paper No. TI 2023-015/VII
Publisher: 
Tinbergen Institute, Amsterdam and Rotterdam
Abstract: 
We propose a tractable method for estimation of a simultaneous search model for differentiated products that allows for observed and unobserved heterogeneity in both preferences and search costs. We show that for type I extreme value distributed search costs, expressions for search and purchase probabilities can be obtained in closed form. We show that our search model belongs to the generalized extreme value (GEV) class, which implies that it has a full information discrete-choice equivalent, and hence search data are necessary to distinguish between the search model and the equivalent full information model. We allow for price endogeneity when estimating the model and show how to obtain parameter estimates using a combination of aggregate market share data and individual level data on search and purchases. To deal with the dimensionality problem that typically arises in search models due to a large number of consideration sets we propose a novel Monte Carlo estimator for the search and purchase probabilities. Monte Carlo experiments highlight the importance of allowing for sufficient consumer heterogeneity when doing policy counterfactuals and show that our Monte Carlo estimator is accurate and computationally fast. Finally, a behavioral assumption on how consumers search provides a micro-foundation for consideration probabilities widely used in the literature.
Subjects: 
demand estimation
price endogeneity
simultaneous search
differentiated products
JEL: 
C14
D83
L13
Document Type: 
Working Paper

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